Professor Bainbridge...on law, politics, religion, culture & food

Director Primacy via SOX?

In my forthcoming book on director primacy, I argue that forty years ago, managerialism dominated corporate governance in the United States. In both theory and practice, a team of senior managers ran the corporation with little or no interference from other stakeholders. Shareholders were essentially powerless and typically quiescent. Boards of directors were little more than rubber stamps. Today, American corporate governance looks very different. The Imperial CEO is a declining breed. Some classes of shareholders have become quite restive, indeed. Most important for our purposes, boards are increasingly active in monitoring top management rather than serving as mere pawns of the CEO.

A new paper by Ernie Englander and Allen Kaufman offers an analysis that I think supports my claims:

Berle and Means introduced the “managerial thesis” nearly eighty years ago in their classic text, The Modern Corporation and Private Property. They argued that control of the corporation in the United States had already shifted from large shareholder groups (founding families and financial capitalists) to professional, non-shareholding managers.We propose to re-evaluate the managerial thesis by arguing that economic forces and regulatory initiatives have shifted corporate control from focal firm managerial teams to independent outside directors. Today, director control remains intact, despite financial market concentration, institutional investor savvy, and regulatory reforms. However, director demographics have changed fundamentally. Independent, non-management directors, recruited disproportionately from the ranks of active and retired CEOs, have displaced inside - directors as the dominant group.